Elsevier

Business Horizons

Volume 60, Issue 2, March–April 2017, Pages 179-188
Business Horizons

Choose wisely: Crowdfunding through the stages of the startup life cycle

https://doi.org/10.1016/j.bushor.2016.11.003Get rights and content

Abstract

Crowdfunding is attractive to startups as an alternative funding source and offers nonmonetary resources through organizational learning. It encompasses the outsourcing of an organizational function, through IT, to a strategically defined network of actors (i.e., the crowd) in the form of an open call—specifically, requesting monetary contributions toward a commercial or social business goal. Nonetheless, many startups are hesitant to consider crowdfunding because little guidance exists on how the various types of crowdfunding add value in different life cycle stages and which type is best suited for which stage. In response to this gap, this article introduces a typology of crowdfunding, the benefits it offers, and how specific benefits relate to the identified crowdfunding types. On this basis, we present a framework for choosing the right crowdfunding type for each stage in the startup life cycle, in addition to providing practical advice on crowdfunding best practices. The best practices outlined have shown demonstrable contributions toward achieving funding goals and are likely to prove valuable for startups.

Section snippets

Startups and crowdfunding

Startups require resources to succeed and one of the most important resources is money. Traditionally, the options for capital formation available to startups were few and comprised primarily of FFF (friends, family, fools), angel investors, venture capitalists, and seed funding (Startup Explore, 2014). More recently, there has been a surge in alternative models. Among these, crowdfunding has emerged as a popular source of capital formation in various fields—from purely for-profit to social

Types of crowdfunding

Crowdfunding as an online distributed funding model suggests that requesting relatively small monetary contributions from a crowd helps startups acquire critical financial resources. In this context, crowdfunding is viewed as a homogenous concept: a general request for money via an open call. However, just as the funding needs for startups vary, crowdfunding varies by the type of rewards offered to supporters. The following section outlines a typology of crowdfunding (see Table 1) by

Benefits of crowdfunding for startups

The previous section introduced a typology of crowdfunding that considers the type of return or reward to backers. While this is an important first aspect to understand, a startup also needs to consider the specific benefits it aims to achieve in pursuing crowdfunding efforts. First, crowdfunding helps alleviate the capital crunch many startups face. Many campaigns aim to raise a relatively small sum of money for a one-time project or event (Mollick & Kuppuswamy, 2016). Other projects intend to

Selecting the best crowdfunding type for each stage

As previously laid out, crowdfunding provides monetary and non-financial resources. However, in the prevailing view, a startup is often viewed as a single construct: an individual aiming to turn an idea into a viable business that requires resources. The challenge with this view is that it ignores the life cycle a startup undergoes, where each life cycle stage has unique monetary and nonmonetary resource needs. The following section addresses this challenge and suggests that a startup can

Best practices on how to attract a crowd and its contributions

As laid out in the previous section, startups are able to identify the most suitable crowdfunding type by considering their specific life cycle stage and resource requirements. Once the choice of crowdfunding type is made, campaign proponents face the next challenge, which is how to attract people and their contributions. Crowdfunding is a transactional relationship between founder and funder. The information asymmetry between these two parties makes this relationship imbalanced and

Final thoughts on crowdfunding for startups

This article offers contributions to both the practitioner and research communities. For startups, it demonstrates that crowdfunding can generate a valuable organizational resource base, primarily through the acquisition of funds, but also through nonmonetary resources in the form of learning, the formation of crowd capital, and marketing (Brown et al., 2017, McCarthy et al., 2013, Prpić et al., 2015). But not all crowdfunding types are equally suited to support the various resource

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